IMF Wraps Up 2023 Consultation with St. Kitts and Nevis

Washington, DC : On March 15, 2023, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1]with St. Kitts and Nevis.

St. Kitts and Nevis' economic growth rebounded strongly in 2022 despite global headwinds. GDP is estimated to have grown by 9 percent in 2022 after contracting 14.5 percent in 2020 and 0.9 percent in 2021. The lifting of all COVID-related travel restrictions in August 2022 sparked a strong rebound in the tourism sector and across the economy. The authorities' proactive policy response, facilitated by the fiscal buffers accumulated from a decade of prudent fiscal policy, helped shelter domestic prices from high global energy and food prices. These measures nonetheless took a heavy toll on fiscal accounts in 2022. The primary balance ex-CBI revenue and land buybacks, an indicator of the underlying fiscal stance, deteriorated to a deficit of 17 percent of GDP (vs. 15 percent in 2021). Large CBI inflows in 2022 helped finance this expansion, keeping public debt below the ECCU regional target of 60 percent of GDP.

Return to the pre-pandemic activity level is expected by end-2024, and beyond that, growth should converge towards its medium-term path. The budget is expected to be broadly balanced through 2025 and then go into deficits—predicated on current policies. Risks to the outlook are tilted to the downside in the short term, but with some upside potential in the medium term. Downside risks primarily stem from a global slowdown, particularly in the United States, global inflation, and sustained commodity price volatility from lingering geopolitical uncertainty. The growing dependance on volatile and uncertain CBI revenue is a major source of vulnerability. But prospects for an acceleration of the transition to renewable energy and increased investment in resilience by the broader public sector could represent a material upside risk.

The authorities are committed to maintaining a prudent fiscal stance going forward. Small budget surpluses are planned for the next three years, supported by the phasing-out of electricity price subsidies and streamlining of income support measures. They reiterated their intention to undertake structural fiscal policy changes to reduce dependency on CBI revenues over the medium term. They also remain committed to investing in natural disaster resilience and climate change adaptation.

Executive Board Assessment[2]

The strong economic rebound in 2022 was moderated by tighter global financing conditions and high fuel and food prices. While proactive policies facilitated by accumulated buffers helped keep inflation under control, the fiscal measures have weighed on public finances. Strong Citizenship-by-Investment (CBI) flows cushioned the impact of higher expenditures on public debt but also increased reliance on these revenues. Looking ahead, as risks are tilted to the downside in the short run, Directors encouraged the authorities to pursue prudent fiscal policies, ensure financial stability, and implement ambitious structural reforms to boost sustainable and inclusive growth.

Directors concurred that the fiscal stance should be tightened to entrench debt sustainability, and noted the importance of the planned phasing-out of electricity price subsidies and other crisis-era support measures. Containing current expenditures, notably the wage bill, will help create space for sustainable investment. Directors called for reducing dependence on CBI revenue, which would require an overhaul of the taxation framework, including reducing tax expenditures, streamlining VAT, reforming property taxes, and introducing a progressive personal income tax.

Directors emphasized the need for structural policies to strengthen competitiveness, labor market development, and diversification. They recommended higher resilient infrastructure spending and an optimal insurance framework against natural disaster risks, and endorsed the authorities' strategy to transition toward renewable energy. They supported the plan for a sovereign wealth fund to finance resilient investment and ensure adequate fiscal buffers. Directors welcomed efforts to improve the delivery and access to education and vocational training, which should be complemented by active labor market policies, to reduce skills mismatches and promote job opportunities.

Directors called for a re-assessment of the business model of the systemically important bank, noting that further progress is needed to de-risk its investment portfolio and reduce NPLs. They stressed the importance of ring-fencing public sector deposits from risks in any single bank. Close monitoring of credit unions and continuing to advance the AML/CFT agenda would be important.